What stages we passed through, what it cost and how much money you need to create a startup. Let’s sum up the work we did in the past 12 months.
In our previous blog posts, we explained that what we’ve been doing for more than a year and a half is called a startup studio, or a venture builder. It’s a digital business model where you release a product in form of other digital products. In other words, it’s a factory for creating online businesses.
Our evolutionary path led us to this format through failures, confusion, and reflection. As often happens with startups, the moment you thought you came up with something cool and new, it turns out 5 such projects have already had an IPO in the USA.
We had something similar. First, we created a project, and then we realized who we are, what we are, and what place our activity takes in the international classification. So we sighed in sorrow that all good things had already been invented a hundred times and went on to dig for more information.
Fortunately, now we know that such a business model has been around since 1996. The pioneering startup studio was IdeaLab. It released many projects that managed to grow both till exits and IPOs, which was a clear pay-off.
But when you start looking at more recent materials, you come across an interesting paradox. On the one hand, there is tons of info. Startup studios even have their own trade union: GSSN. But there is little practical data and methodology, and the figures are very approximate.
It means there are hundreds of startup studios that have been creating projects for a long time. Some will even show you their concepts or share how much money they raised from investors, how strongly they support the environment. Their corporate-style PR will banter about how they tried very hard and did a lot of things. “Look what we have achieved in X years!”
But that’s it.
What Do Startup Studios Keep to Themselves?
Studios don’t like to share about their failures, details of their work, and most importantly, on the figures inside the sales funnel as projects grow. They are silent about how this is expressed in finances. Did anyone make money or just kept performing and creating with no benefits?
The startup studios say nothing about the payback of such models.
Therefore, it is impossible to compare your projects with someone or mimic their financial model. You can’t really figure if it pays to stay in THIS market with THAT business model. There’s no information that would help you understand how much your project’s stages will cost. Sure, you can find something useful about the US market, but there’s nothing to read about Eastern Europe. However, it would be fair to say that there are only a dozen startup studios here.
That’s why we decided to contribute and payback to the community that raised us. So we will tell you a little more about the behind-the-scenes of a startup studio in the CIS. You’ll learn what we achieved in a year of work and how much it all cost for our customers.
Sometimes design studios that implement projects for their customers call themselves startup studios, too. In addition to design and code, they would also hire a team and display some of the first metrics. That’s why we need to understand the terms to avoid confusion.
What Is It, Anyway?
In our understanding, a startup studio or a venture builder is a systematic producer of Internet businesses. But when you start working on a project, you don’t know which business you will make money on.
In a startup studio, finding, testing, and building an idea that you can scale and monetize is 80% of your work. You can’t just implement someone’s idea because in 90% of cases it’s just a hallucination that requires too much luck to succeed.
Our studio serves as a cofounder in our projects. Usually, a startup is founded by 1–3 people, but it’s not our case. Instead, we are a cofounding company that takes on many tasks and functions.
Looking for a cofounder or just willing to create a startup with us? Welcome!
In addition to financing and fundraising, we provide business services that a project may need to grow. In fact, the founding product manager can only deal with the business model and project growth. We take over everything else from HR issues, accounting, and lawyers to development and marketing.
We have already described how exactly we create projects, so today we will focus on the results of 12 months of work.
Key Figures. Our Production Volume
The core of the team needed to build and run a decent startup studio is about 5–6 people. Let’s call them top management. Teamwork is a must, so if you’re a lone wolf, there is nothing to catch. Altogether, including the teams of our projects, we have about 200 people.
In a year, we tested about 150 ideas from the general backlog of 400–500 rated and relevant businesses. At the initial stages, ideas are tested by the so-called product managers. But we must note that “product managers” as the market sees them and “product managers” that we need are completely different people.
We have our own system for selecting the right people, training, and introducing them to our studio’s game rules. Therefore, the selection is very strict. Out of 60 candidates who, after many tests, reached the probationary period about 20 people remained with us.
Of the 150 ideas that went into work thanks to our product managers, the studio brought 30% of the ideas to the pre-seed stage.
Life Stages an Idea Passes on Its Way to Becoming a Business
Our studio simulates a conventional venture capital market, so we have all the same stages: an idea, MVP, pre-seed, seed, and round A.
The first investment committee takes place at the pre-seed stage. It decides whether to invest in a project and its further work. As we already said, about 45 projects reached this stage.
Then there is a large seed-round where hundreds of thousands of dollars are allocated for further development. Only 20% of projects reached this stage.
What does it mean?
We come to our customers (corporations) and show projects that, in our opinion, are ready for investments. If the client approves them, then projects get investments and reach the seed stage.
Our studio started its operation in November 2018. In April 2019, we approved the goals for the year, thinking it would be great if 5 projects passed the investment committee by the end of 2019.
Now we have 9 startups that have passed the selection.
Show Me Your Money! How Much It Costs?
The most interesting thing that no one talks about is how much it all costs.
Spreading out salary sheets might be too much, of course, but we’ll share the most important thing instead: how much it costs for corporations that ordered custom startups.
When we calculated all costs, including payroll, marketing, counterparties, office rent, and even cookies, we were really surprised.
If you are an independent venture investor, you can buy 20% of a seed-level project for 300–400 thousand dollars (meaning a classic seed-round estimated at $1.5 million for 100% of the company).
- The pipeline costs (finding projects, coming to terms with their management, etc. still costs money).
- Risks associated with corporate culture and project background. Deep checks are rare in the early stages, and some unpleasant facts might come up even years after (for example, a programmer of a startup’s beta version shows up and demands their share).
Our customer received 80% in 9 seed-level projects at a price of $1 million.
When calculating the estimate and cost of 1% ownership, it’s still absolutely proportional no matter if you’re looking for projects in the market or getting it with a startup studio’s help. And these are projects without any past issues, precisely in the niche and for the strategic tasks that a customer was interested in.
A large share of ownership guarantees two advantages:
- more control than in a standard venture business (our studio is interested in startup’s growth just as much as the founders are; it saves the investor from an unexpected “founder’s downshifting to Bali”);
- consolidation of the project’s revenue and adding it to the capitalization of the main business (the rule is relevant for all shares over 50% of ownership).
Nothing New. Anybody Can Create a Startup!
Sure, creating projects is half the battle. You also need them to become profitable. Therefore, our studio consists of two main modules: an incubator (creation) and a management company (assistance in development and management).
In 12 months, projects created from scratch started operating on their own. But we don’t use any tricks. Say, some studios create a product internally and then launch it into the distribution network of the main business which has been there for 20 years. This way they can say, “Our new product has earned X thousand dollars.” But we don’t do that. Instead, it’s all about income from ground zero without attracting external capacities, and only with the investment money that the project received (over $1.5 million). By the end of the year, we plan to increase this number x3.
Taking into account all plans for development and growth, we expect to break even in 1.5–2 years and payback in 3 years on average. The mortality rate after the seed round should be no more than 10% since all childhood diseases were already filtered out and avoided in the incubator.
We can’t say if these figures are good or bad as there’s little data to compare with.
Hopefully, this article will be useful to our colleagues in start-up studios, product departments, project offices, and simply Internet entrepreneurs. There are never enough startups. We would all win if there were thousands of projects, both small and giants ones because the latter would buy out the former.
Why Investors Want It
It is important to note that we do not consider the startup studio model to be a magic pill that eliminates all the risks. No, we’re still in the high-risk venture capital market where a project can go wild or fail. But we expect that a studio portfolio will be 10–15% less risky than a classical venture approach.
Additionally, we can somewhat solve the issue of ROI since from the very start, there is an understanding of why the client needs this project. We already know that the project can pay off to the investor, and it won’t only be through a sale.
When talking about corporations, ideally, there should be both a corporate venture fund (to work with startups in the market) and a project generator (to create startups for their insights and tasks). Essentially, studios can assume that role.
As for the Admitad Projects startup studio, this year we will continue to create new projects and manage our portfolio, adding new services to accelerate the growth of each business. And we will, of course, continue to share our knowledge.